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China: Trade deficit will be temporary

Chinese trade balance was negative in March. It was USD -0.8bn. It is not a surprise. As it can be seen on the first chart, and for the last three years trade balance is negative during the month following the Chinese New Year period. As activity is low during this specific period, imports are low too and there is a surge just after. This is a simple catch up effect.

Cumulated over a year the Chinese trade balance has a large and solid surplus of USD 280bn.

In March, imports were up by 14.1% compared to March 2012. But for the whole quarter import growth was just 8.8% compared to 2012 first quarter. This does not necessarily reflect a strong internal demand. March figures were mainly a catch up on imports and we cannot spontaneously imagine that this trend will continue. Reading of other indicators goes in the same way.

Export momentum was strong in January and February even with the Chinese New Year. This was a surprise in February as activity was on a lower dynamic. Export growth was lower in March, just 10 % compared to March 2012. But comparing quarters exports are higher by 18.4% this year. Nevertheless looking at the chart below reveals that January and February are really specific and not consistent with what was seen in 2012.

Explanations of this exports behavior can be found in the chart below. Chinese recovery after the weak period in spring 2012 has had a strong impact on its neighbors. This contagion effect has been addressed earlier this month on this blog and can be found here. The main contribution to Chinese export growth comes from Asia and is a measure of this contagion effect. The momentum has been strong in January and February and has lost of intensity in March but is still robust.

Contributions from the United States and from the Euro Area are modest. China cannot find strong supports from its two main customers. Growth is still below potential in the USA and the Euro Area is in recession. This is not specific to China. World trade and other emerging countries’ trade are also conditioned by this situation in main industrialized countries.

In order to have a measure of internal demand intensity, oil demand trend is interesting. On the chart below demand is not growing rapidly. We can infer that Chinese internal demand is not very strong and is not leading to a break in trend that could propel Chinese growth above the 8 % that is currently expected growth for 2013.

Conclusion

Four points to keep in mind on Chinese trade balance.

As the contagion has been seen from China to other Asian countries, the impulse seen on Chinese exports to them is probably over. This means that export growth trend is probably closer to 10 % than to 15 or 20 %.

As internal demand is on a soft trend we cannot expect a new surge in imports in the coming months. China will continue to rebalance its growth process to reinforce this internal demand.

All this means that negative trade balance was transitory in March and in April the deficit will become a surplus. This is clear from the first chart. The adjustment after the Chinese New Year is done in a month. As internal demand is on a soft trend this one month adjustment will continue.

All these elements mean that we cannot spontaneously expect a strong impetus from China on world trade that could change global trend growth. That’s a new step toward a multipolar world.